While small-cap stocks, such as Shri Ram Switchgears Limited (NSEI:SRIRAM) with its market cap of ₹216.23M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into SRIRAM here.
How does SRIRAM’s operating cash flow stack up against its debt?
SRIRAM’s debt levels surged from ₹188.7M to ₹316.8M over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, SRIRAM currently has ₹70.0M remaining in cash and short-term investments , ready to deploy into the business. However, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of SRIRAM’s operating efficiency ratios such as ROA here.
Can SRIRAM pay its short-term liabilities?
Looking at SRIRAM’s most recent ₹382.5M liabilities, it appears that the company has been able to meet these commitments with a current assets level of ₹654.1M, leading to a 1.71x current account ratio. Generally, for electrical companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is SRIRAM’s level of debt at an acceptable level?
With total debt exceeding equities, SRIRAM is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if SRIRAM’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For SRIRAM, the ratio of 1.78x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
Are you a shareholder? SRIRAM’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that SRIRAM’s financial situation may change. I recommend keeping on top of market expectations for SRIRAM’s future growth on our free analysis platform.